Day Hagan Smart Core Equity Strategy Update May 2026
A downloadable PDF copy of the Article:
Summary
The DH Smart Core Equity Portfolio is designed to invest in companies that we believe have the potential to deliver excess returns through positive economic profitability, solid balance sheets (quality), meaningful cash generation (profitability), and trading at considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.
Strategy Update
In April, U.S. equities advanced sharply as strong corporate earnings, renewed enthusiasm for artificial intelligence, and solid economic data outweighed concerns about inflation and interest rates. The rally was led by large-cap technology, software, semiconductor, and AI infrastructure companies, helping the Nasdaq, S&P 500, and Dow post strong monthly gains. Market leadership, however, was narrow. Investors rewarded companies with visible earnings momentum, pricing power, and direct exposure to AI-related capital spending, while more traditional and defensive factors lagged.
First-quarter earnings were a key support. According to FactSet, as of May 1, S&P 500 companies had reported blended earnings growth of 27.1% and revenue growth of 11.1%. Communication Services, Information Technology, and Consumer Discretionary led results, while seven sectors posted double-digit earnings growth. This helped offset concerns about higher input costs, energy volatility, and geopolitical uncertainty.
The macro backdrop remained mixed. March CPI rose 3.3% year over year and 0.9% from the prior month, driven largely by a 10.9% increase in energy prices and a 21.2% jump in gasoline. The inflation surprise reinforced the risk that rates could stay higher for longer. The Federal Reserve held its benchmark rate at 3.50%–3.75% on April 29 and maintained a data-dependent stance.
Growth data still supported risk assets. First-quarter GDP expanded at a 2.0% annualized rate, March personal spending rose 0.9%, and PCE inflation remained elevated at 3.5% year over year. Manufacturing also remained in expansion, with the ISM index at 52.7, though input cost pressures intensified.
This environment helps explain why deep value and quality struggled. Deep value stocks were weighed down by cyclical exposure, margin sensitivity, and limited participation in the AI-led growth narrative. Quality also lagged because many high-quality defensive businesses offered stability but lacked the earnings acceleration investors were chasing. In a month defined by narrow leadership and rising inflation expectations, the market favored growth scarcity over valuation discipline or balance-sheet strength.
Overall, April showed that equities can rally powerfully when earnings expectations rise, but inflation, energy prices, and central bank caution remain important, volatile factors that can quickly shift short-term trends.
The portfolio entered the current earnings season with a balanced but constructive sector profile. Exposure is diversified across technology, communication services, health care, financials, energy, real estate, staples, and select consumer names, while the cash and Treasury bill allocation provides liquidity and helps moderate overall volatility. The sector mix is especially notable because it combines companies tied to secular growth themes, including cloud software, digital advertising, payments, AI infrastructure, and health care innovation, with businesses that may benefit from income, pricing power, and more defensive demand characteristics.
From a factor perspective, the portfolio appears positioned to participate in the market’s improving earnings backdrop without relying solely on the highest-multiple mega-cap technology trade. Holdings such as Alphabet, Amazon, Meta, Netflix, Salesforce, Adobe, Qualcomm, Cisco, and Accenture provide exposure to areas where earnings expectations have been strongest, particularly communication services and information technology. At the same time, positions in Merck, Bristol Myers, Novo Nordisk, Hershey, Campbell’s, Realty Income, NNN REIT, VICI, Kinder Morgan, Chevron, and National Fuel Gas provide diversification across health care, consumer staples, real assets, and energy-linked cash flows. This implies that the portfolio has meaningful exposure to companies benefiting from positive revisions, stronger-than-expected margins, and improving demand.
The latest FactSet earnings data supports a more optimistic view of the broader profit cycle. With 63% of S&P 500 companies reporting Q1 results, 84% delivered positive EPS surprises, and 81% reported positive revenue surprises.
While valuations remain above long-term averages and outcomes are never assured, the recent earnings season suggests the portfolio is aligned with areas where fundamentals are improving. The combination of growth exposure, defensive ballast, income-oriented holdings, and liquidity provides a constructive foundation for the months ahead.
Software holdings in the portfolio have struggled because the market has been rewarding a narrower version of technology leadership than usual. Investors have favored the most direct AI infrastructure beneficiaries, especially semiconductors, mega-cap platforms, and data-center-related names, while many application software companies have been treated more cautiously. For holdings such as Adobe, Salesforce, Zoom, Dropbox, Amdocs, Cognizant, Gartner, and Accenture, the issue has not necessarily been poor businesses, but concern that enterprise software budgets remain selective, sales cycles are longer, and AI could pressure pricing or require elevated investment before revenue benefits become fully visible.
Recent earnings data do not suggest a broad collapse in software fundamentals. FactSet reports that the S&P 500 Information Technology sector is showing 50.0% year-over-year earnings growth, with the software industry specifically up 22% and IT services up 8%. Revenue trends also remain positive, with software revenue growth of 18% and IT services growth of 8%. That backdrop makes the magnitude of recent weakness appear more like a valuation and sentiment reset than a fundamental breakdown. That suggests the market may be applying a very low bar to companies whose fundamentals remain serviceable to strong.
Investors may be overly pessimistic if they assume that AI permanently disrupts incumbent software franchises without recognizing that many of these companies can embed AI into workflows, improve productivity, expand margins, and deepen customer relationships. Valuations in several software names have compressed meaningfully, and while “cheap” depends on growth durability, current prices appear to reflect a low bar for improvement.
The trend could turn more positive if earnings revisions stabilize, AI monetization becomes clearer, and corporate spending improves. In that scenario, today’s weakness may prove to have been an overreaction rather than a lasting impairment.
Adobe may be the clearest example of how market pessimism can become excessive. Its current forward P/E is approximately 10.4x, price-to-book about 8.9x, free cash flow yield around 10.2%, and ROIC at 36%. This compares with a five-year average FCF yield of about 5.2% and a significantly lower ROIC several years ago. This combination signals a much more attractive valuation, even as Adobe maintains exceptional profitability. Salesforce also appears significantly undervalued, with a forward P/E near 14.0x and price-to-book around 2.5x—modest levels for a company that consistently generates substantial recurring revenue and free cash flow.
Zoom, Dropbox, Amdocs, and Cognizant strengthen the case for undervalued cash-flow generators. Zoom trades at around 17.6x forward earnings, 3.1x book value, and roughly 15.8x free cash flow—below its five-year average price/free-cash-flow multiple. Dropbox is even more compelling, with a forward P/E near 8x and a free cash flow yield of about 16.7%, though book value is less relevant given its capital structure. Amdocs and Cognizant trade at approximately 8.6x and 9–11x forward earnings, respectively, with Amdocs offering an FCF yield near 11%. Adding quality, Accenture’s forward P/E is around 14x and FCF yield near 11%, compared to a five-year average FCF yield closer to 5.7%. Gartner’s FCF yield approaches 11.9%, and its ROIC remains robust at roughly 26%.
Many of our holdings generate recurring revenue, maintain strong customer relationships, deliver robust free cash flow, and offer potential for margin expansion—yet they still trade below historical valuation levels. If operating results hold steady or improve, these companies could deliver attractive returns without relying on aggressive assumptions. We believe that a mix of earnings stability, renewed market confidence, and reasonable valuation normalization creates meaningful upside potential.
Several portfolio companies operate in sectors often regarded as mature or overlooked, including collaboration software, legacy enterprise platforms, workflow tools, customer engagement, and IT services. While these segments may attract less attention than disruptive technologies, they benefit from recurring revenue, high switching costs, enduring customer relationships, and strong free cash flow—qualities that are especially valuable in today’s valuation-conscious market.
We believe the current environment offers a compelling setup. If enterprise spending remains stable or improves, these businesses could achieve greater earnings durability and margin expansion than current valuations imply. Many also stand to benefit from efficiency initiatives, product enhancements, and selective AI adoption—without requiring overly optimistic assumptions. In our view, the interplay of durable fundamentals, modest expectations, and reasonable valuations creates an attractive risk-reward profile.
In summary, investors appear overly pessimistic. Earnings data do not indicate an imminent collapse, and many holdings are no longer priced for perfection. Should enterprise spending stabilize, AI monetization become more defined, or earnings revisions turn positive, the current downtrend may ultimately prove to be a significant overreaction—not a lasting setback.
The portfolio sector allocations versus the Russell 1000 Value Index are as follows: Information Technology 25.2% vs. 13.6% benchmark, Healthcare 9.4% vs. 11.7%, Financials 10.5% vs. 19.9%, Consumer Discretionary 6.7% vs. 7.0%, Communication Services 9.1% vs. 7.9%, Industrials 1.9% vs. 13.5%, Consumer Staples 6.6% vs. 7.5%, Energy 7.3% vs. 7.7%, Utilities 5.0% vs. 4.7%, Materials 0.0% vs. 4.4%, Real Estate 9.1% vs. 4.2%, and cash levels approximating 9.2%.
If you have any questions or would like to discuss the portfolio in more detail, please do not hesitate to contact us directly.
Sincerely,
Donald L. Hagan, CFA®
Regan Teague, CFA®, CFP®
Disclosure: The aforementioned positions may change at any time.
Disclosure: *Note that individuals’ percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. Returns are based on a representative account. The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses.
This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
Data and analysis are provided “as is” without warranty of any kind, either express or implied. Day Hagan Asset Management, its affiliates, employees, or third-party data providers shall not be liable for any loss sustained by any person relying on this information. All opinions and views expressed are subject to change without notice and may differ from those of other investment professionals within Day Hagan Asset Management or Ashton Thomas Private Wealth, LLC.
Accounts managed by Day Hagan Asset Management or its affiliates may hold positions in the securities discussed and may trade such securities without notice.
Day Hagan Asset Management is a division of and doing business as (DBA) Ashton Thomas Private Wealth, LLC, an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
This material is for educational purposes only. Further distribution is prohibited without prior permission. There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trail
Sarasota, FL 34236
Toll-Free: (800) 594-7930 | Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
*Software group 3/5/2026 closing price against its all-time closing high: IT -69.0%, ZM -86.4%, TTD -78.6%, ADBE -59.1%, ACN -45.1%, CRM -44.8%, DBX -37.2%, QCOM -37.3%, DOX -26.0%, CTSH -25.9%, META -16.2%, AMZN -13.8%, GOOGL -12.4%, and CSCO -7.3%. Results are based on share price drawdowns from all-time closing highs to the closing price on March 5, 2026. The price-history sources used present historical stock prices and corporate action adjustments, such as splits, but this comparison does not include reinvested dividends and therefore should be viewed as a price return measure rather than a total return measure.
Definitions:
S&P 500 Index: A market-capitalization-weighted index of 500 large U.S. companies across major sectors. It is commonly used as a broad measure of U.S. large-cap equity market performance. The index is unmanaged, does not include fees or expenses, and cannot be invested in directly.
IWD / Russell 1000 Value ETF: IWD refers to the iShares Russell 1000 Value ETF, which seeks to track the investment results of the Russell 1000 Value Index. The ETF provides exposure to large- and mid-cap U.S. companies with value characteristics. ETF performance may differ from the index due to fees, expenses, tracking differences, and market conditions.
PMI / Purchasing Managers’ Index: An economic indicator based on surveys of purchasing managers. A PMI reading above 50 generally indicates expansion, while a reading below 50 generally indicates contraction. PMI data are survey-based and may not fully reflect actual economic output.
DJIA / Dow Jones Industrial Average: A price-weighted index of 30 large, established U.S. companies. Because it is price-weighted and includes fewer companies than broader indexes, it may not fully represent the overall U.S. equity market. The index is unmanaged and cannot be invested in directly.
T-Bill / Treasury Bill: A short-term debt obligation issued by the U.S. Treasury, typically with a maturity of one year or less. Treasury bills are backed by the full faith and credit of the U.S. government if held to maturity, but prices and yields may fluctuate before maturity.
REIT / Real Estate Investment Trust: A company that owns, operates, or finances income-producing real estate and typically distributes a significant portion of taxable income to shareholders. REITs may be sensitive to interest rates, property values, occupancy trends, financing costs, and economic conditions.
Nasdaq Composite Index: A market-capitalization-weighted index that includes thousands of companies listed on the Nasdaq Stock Market. It has significant exposure to technology and growth-oriented companies, so its performance may differ materially from that of more diversified equity indexes. The index is unmanaged and cannot be invested in directly.
Artificial Intelligence / AI: Technology designed to perform tasks that typically require human intelligence, such as pattern recognition, prediction, automation, and language processing. References to AI should not be interpreted as a guarantee that a company will benefit financially from AI adoption.
AI Infrastructure: Hardware, software, data centers, networking equipment, and related services used to support artificial intelligence workloads. Companies with exposure to AI infrastructure may or may not realize revenue or margin benefits from AI-related demand.
Application Software: Software used by businesses or consumers to perform specific tasks, such as customer relationship management, collaboration, document creation, analytics, or workflow management.
Blended Earnings Growth: A measure that combines actual reported earnings for companies that have already reported with estimated earnings for companies that have not yet reported. Blended figures may change as additional companies report results.
Cash / Treasury Bills: Cash or short-term U.S. Treasury securities held for liquidity, income, or risk management. Treasury bills are backed by the U.S. government if held to maturity, but funds or ETFs that hold Treasury bills can fluctuate in value.
Consumer Discretionary: A market sector consisting of companies that sell non-essential goods or services, such as retail, apparel, entertainment, travel, restaurants, and certain internet retailers. Results may be sensitive to consumer spending trends.
CPI: Consumer Price Index. The Consumer Price Index measures the average change over time in prices paid by urban consumers for a market basket of goods and services.
Consumer Staples: A market sector consisting of companies that sell essential products, such as food, beverages, household goods, and personal care items. These businesses are often viewed as more defensive, though they remain subject to cost, pricing, and demand pressures.
Deep Value: An investment style focused on companies trading at low valuations relative to earnings, cash flow, book value, or other fundamental measures. A low valuation alone does not guarantee future appreciation and may reflect business, financial, or industry-specific risks.
Defensive Ballast: Portfolio exposure intended to help moderate volatility during uncertain markets. Defensive holdings may still decline in value and may underperform during strong risk-on markets.
Digital Advertising: Advertising delivered through online platforms, search engines, streaming services, social media, or other digital channels. Revenue may be affected by advertiser budgets, regulation, competition, and economic conditions.
Earnings Acceleration: An increase in the rate of earnings growth. Companies with accelerating earnings may attract investor interest, but future earnings growth remains uncertain.
Earnings Revisions: Changes to analysts’ earnings estimates. Positive revisions indicate estimates have increased, while negative revisions indicate estimates have decreased. Revisions are not guarantees of future results.
Earnings Surprise: The difference between a company’s reported earnings and consensus analyst expectations. A positive surprise occurs when reported earnings exceed expectations; a negative surprise occurs when they fall short.
Enterprise Spending: Business spending on technology, software, services, infrastructure, and related tools. Enterprise spending can fluctuate with economic conditions, budgets, interest rates, and management priorities.
EPS / Earnings Per Share: A company’s earnings divided by its shares outstanding. EPS may be reported on a GAAP or non-GAAP basis and should be evaluated alongside revenue, cash flow, margins, and balance sheet quality.
Factor Exposure: Portfolio exposure to investment characteristics such as value, quality, growth, momentum, dividend yield, size, or volatility. Factor performance can vary significantly across market environments.
Forward P/E Ratio: A valuation measure calculated by dividing a company’s current share price by expected earnings per share over a future period, typically the next 12 months. Forward P/E ratios rely on estimates that may prove inaccurate.
Free Cash Flow: Cash generated by a company after capital expenditures. Free cash flow may be used for dividends, buybacks, debt reduction, acquisitions, reinvestment, or retained liquidity.
Free Cash Flow Yield: Free cash flow divided by a company’s market value. A higher free cash flow yield may suggest a lower valuation, but it may also reflect concerns about growth, cyclicality, or business risk.
Growth Scarcity: A market condition in which investors place a premium on companies perceived to have relatively durable or above-average growth prospects. Such companies may still experience valuation compression or earnings disappointment.
Income-Oriented Holdings: Investments selected partly for their ability to generate income, such as dividends or interest. Income levels are not guaranteed and may change.
Input Cost Pressures: Rising costs for labor, raw materials, energy, transportation, or other business expenses. Companies may not always be able to pass these costs on to customers.
Liquidity: The ability to convert an investment into cash without materially affecting its price. Cash and short-term instruments typically offer higher liquidity than many equities or long-duration assets.
Market Leadership: The sectors, industries, styles, or companies contributing most to market performance over a given period. Leadership can change quickly.
Mega-Cap Technology: Very large technology or technology-adjacent companies by market capitalization. These companies can have an outsized effect on index performance.
Net Profit Margin: Net income divided by revenue. It measures how much profit a company earns from each dollar of sales. Margins may fluctuate due to pricing, costs, taxes, mix, and one-time items.
Positive Revenue Surprise: A reported revenue figure that exceeds consensus analyst expectations. Revenue surprises should be evaluated alongside profitability, cash flow, margins, and guidance.
Price-to-Book Value: A valuation ratio calculated by dividing a company’s market price by book value per share. This metric may be less useful for companies with significant intangible assets, share repurchases, or negative book value.
Pricing Power: A company’s ability to raise prices without significantly reducing demand. Pricing power can vary by product, competitive environment, customer behavior, and economic backdrop.
Quality: An investment style often associated with companies that have strong balance sheets, consistent profitability, high returns on capital, stable earnings, or durable competitive positions. Quality stocks can underperform depending on market conditions.
Recurring Revenue: Revenue expected to repeat over time, often from subscriptions, contracts, renewals, or ongoing customer relationships. Recurring revenue can improve visibility but is not guaranteed.
Return on Invested Capital / ROIC: A measure of how efficiently a company generates operating profit relative to the capital invested in the business. ROIC calculations may vary by data provider and methodology.
Sector Exposure: The percentage of a portfolio invested in a particular sector, such as Information Technology, Health Care, Financials, Energy, Real Estate, or Consumer Staples.
Secular Growth: Long-term growth driven by structural trends rather than short-term economic cycles. Secular growth trends may not translate into investment returns.
Software Revenue Growth: The rate at which software-related revenue increases over a given period. Growth can be affected by demand, pricing, customer retention, competition, and product cycles.
Valuation Compression: A decline in valuation multiples, such as P/E, price-to-sales, or price-to-free-cash-flow, even if company fundamentals remain stable or improve.
Valuation Normalization: A potential movement of valuation multiples toward historical or peer-group averages. This is not assured and may not occur.
Yield: Income generated by an investment, expressed as a percentage of price or market value. Yield may change as prices, distributions, or interest rates change.